Pensioners nationwide could be in line for an annual income boost of more than £560, provided they meet the eligibility criteria. However, this increase in payments could potentially push more pensioners into the tax bracket, resulting in a smaller overall gain.
The rise is scheduled to take effect next April, as part of the government’s ongoing commitment to the Triple Lock. This guarantee ensures that each April, the State Pension increases by either the previous September’s inflation, wage growth, or 2.5% – whichever is the highest. Recent data indicates that wage growth peaked at 4.7%, which is likely to be the increase applied to the Pension next year.
Why more older people could soon pay tax
This means that the State Pension will rise from £230.25 a week to £241.04 a week, or £12,535 a year. While this represents a significant gain for many older individuals, it also places the State Pension just £35 below the tax threshold of £12,570.
Consequently, if someone receives more than the tax threshold, such as if they deferred their pension withdrawal thereby increasing the payments, they will need to start paying income tax. Statistics from 2024 indicate that approximately 8.1 million older people already pay tax in retirement, primarily due to additional income from workplace or private pensions on top of their State Pension.
The tax threshold is also anticipated to remain frozen until 2028, and currently, there’s no indication from the government that those who solely depend on their State Pension will be exempted from tax.
How older people can cut tax on their pensions
Despite this, there are several strategies older people can utilise to avoid paying tax on their pension, either by carefully timing when to withdraw their pension or by investing in a special tax-free account.
Tax-free withdrawals
Upon retirement, people are eligible to make a 25% withdrawal from their pension pot tax-free. However, subsequent withdrawals may be subject to tax, but careful planning and timing of your withdrawals could significantly reduce the risk of being taxed.
By making a 25% tax-free withdrawal each year, you can effectively maintain your pension income while not paying any tax on it. If you have another source of income, you’ll need to calculate all these alongside your State Pension to ensure it doesn’t push you above the tax threshold each year.
Married couples
Being in a marriage or a civil partnership comes with a number of tax benefits. In total, you could reduce the amount of tax you pay by transferring up to £1,260 of your personal allowance to your partner, thus reducing your annual tax by as much as £252 a year.
However, to capitalise on this, your earnings must be less than £12,570 and your partner’s income should also be below £50,270. More information on whether the Marriage Allowance could be suitable for you can be found here.
Investing in ISAs
Depositing money into an Individual Savings Account (ISA) can enable you to make tax-free withdrawals as the funds from the account are not included in your taxable income calculation. This applies to Cash ISAs, Stocks and Shares ISAs, among others.
Bear in mind, there is a plethora of rules and objectives surrounding each different ISA account which could influence your overall savings and income. More information on which ISA might be appropriate for you can be found here.
